Having spent your working life saving towards your retirement, you’ll be faced with some important financial decisions when the day eventually arrives. Chief amongst these is what to do with these savings. Depending on which product you’ve been saving into, you may be required to buy an annuity or you may have a choice as to whether to purchase an annuity. An annuity is simply a product that provides you with a regular income.
When retiring from a pension, pension preservation or retirement annuity, you’re required to use at least two-thirds of the proceeds to purchase an annuity. If you are retiring from a provident fund or a provident preservation fund, you may opt not to purchase an annuity. However, you may consider having some insurance for your retirement by purchasing an annuity with a portion of the proceeds. At retirement, you may split the funds and purchase more than one annuity, but after retirement, no further spitting can be done.
There are two types annuities in South Africa which one can use post-retirement - a life annuity and a living annuity. A life annuity guarantees income payments for life; while with a living annuity, capital is held in an investment vehicle from which regular withdrawals must be made. Since you have the option of splitting the funds and purchasing more than one annuity at retirement, a hybrid annuity has emerged to offer a combination of life and living annuities. Below are some key features of the three annuity options.
What income does a life annuity provide?
The product can either be a non-profit annuity or a with-profit annuity. Non-profit annuities guarantee that you will receive either a certain level of income, an income that escalates at a fixed rate, or an income that escalates with the rate of inflation. With-profit annuity income escalations are declared by the insurer on an annual basis depending on investment returns and other shared performance drivers.
Can I nominate a beneficiary to a life annuity?
Although you may not nominate a beneficiary to a life annuity, some products offer a spouse annuity at a pre-defined percentage of the income should the main life die. Whilst some products offer a guaranteed period of income payments to a second life assured irrespective of whether the main life dies.
What is a living annuity?
A living annuity is an insurance product in which your retirement proceeds are invested in order to provide an income. The living annuity does not insure you against investment risk (the risk that your income or capital is negatively affected by poor investment returns from your underlying investment portfolio). It also doesn’t insure you against longevity risk but it does offer the flexibility not found within a life annuity.
What income does a living annuity provide?
Each year, you choose the amount of income you want to receive within the regulated limits of between 2.5% and 17.5% of the market value. You choose your underlying investment portfolio in a living annuity, unlike in a life annuity. During your lifetime you have no access to the funds paid to the insurer. You only have the right to the annuity payments, but the market value that remains after death passes to your nominated beneficiaries.
What is a hybrid annuity?
A hybrid annuity is an insurance product that offers a combination of a life annuity and a living annuity in a single product. It provides the peace of mind that your retirement income is guaranteed for life from the life annuity component, together with the flexibility of selecting your income rate, underlying investments, and beneficiary nomination from the living annuity component. The hybrid annuity optimises the balance between being insured for retirement (life annuity) and self-insuring (living annuity), to offer the best of both worlds. There are various designs of hybrid annuities available in the market with different increases, features and guarantees; but a hybrid solution is, however, still a combination of two separate legal structures i.e. a life annuity alongside a living annuity.
While there are a number of annuity products to choose from, you need to consider your personal circumstances such as your post-retirement expenses, health, estate planning objectives and acceptance of risks relating to retirement income, such as investment risk, inflation risk and longevity risk. If you need help or advice in planning your retirement, please contact us at NFB Private Wealth Management.